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BALTIC M&A DEAL POINTS STUDY 2018
Baltic M&A Deal Points Study 2018
This fi ft h editi on of the Balti c M&A Deal Points Study is conducted by the legal and regulatory committ ees and working groups of the:
• Estonian Private Equity and Venture Capital Associati on• Latvian Private Equity and Venture Capital Associati on, and• Lithuanian Private Equity and Venture Capital Associati ontogether with contributi ons from the following Balti c M&A law fi rms and alliances:
2
Transactions Analysed
• The study analyses 91 M&A transacti ons completed during the period January 2016 – December 2017.
• This 2018 study compares the results to similar 2016 and 2013 studies.
• The transacti ons included in the survey have the following characteristi cs:
• The survey covered M&A and joint venture transacti ons, i.e. acquisiti on or merger of businesses via share or asset transacti ons, corporate statutory mergers, joint venture agreements or in any other way.
• Only Balti c transacti ons were studied, i.e. M&A transacti ons involving targets operati ng in one or more of the Balti c States: Estonia, Latvia and Lithuania.
• Transacti ons had a deal value over EUR 1 million and were completed during the two year period January 2016 – December 2017.
• No additi onal limitati ons applied as to deal value, the nature of the parti es or the target or the sale procedure of the transacti on.
3
Table of Contents
The Parti es 5Sales Process and Form of Transacti on 15Transacti on Value and Payment 19Governing Law and Dispute Resoluti on 29Representati ons and Warranti es 34 Closing and Conditi ons Precedent 45Liability and Indemnifi cati on 53Joint Ventures and Shareholders’ Agreements 63Covenants 67Due Diligence 70Durati on of Transacti on and Lett ers of Intent 73Financing and Conditi ons Subsequent 77
4
The Parties
General Transaction Characteristics
6
Country of the Target’s Head Office
• Targets in the submitted transactions
were predominantly Baltic,
with Estonia providing 38% of them.
20132016
Estonia
31%
Latvia
26%
Lithuania
35%
Finland
2%
Germany
1% UK 1% Other
4%
98%
2%
No
Yes
96%
4%
No
Yes
Was the target distressed?
Are the shares of the target publicly traded?
Estonia
38%
Latvia
30%
Lithuania
23%
United States
3%
Other
6%
Country of the Target’s Head Offi ce
2018
6
7
Baltic States Where the Target Operates
• Unlike previous periods, significant proportion of the transactions (28%) involve targets operating in all three Baltic countries.
• Targets’ geographical focus outside the Baltics includes Finland, Germany, Poland, United Kingdom, the United States and Russia.
7
2016
Lithuania28%
Estonia25%
Latvia22%
Estonia, Latvia & Lithuania
16%
Latvia & Lithuania4%
Estonia & Latvia3%
Estonia & Lithuania2%
Lithuania16%
Estonia26%
Latvia23%
Estonia, Latvia, Lithuania28%
Latvia, Lithuania3%
Estonia, Latvia3%
Estonia, Lithuania1%
2%2%
3%4%
6%6%6%6%
7%7%
8%12%
16%
Hotels & RestaurantsOther
PharmaceuticalsLogistics & Transport
Food Industry & AgricultureIndustrial Equipment
Media & EntertainmentManufacturing
Financial ServicesConstruction & Real Estate
Retail / WholesaleServices
Energy and UtilitiesTarget’s Main Industries
Baltic States Where the Target Operates
2018 2016
7
8
Country of the Seller
• Similarly to all previous studies, the majority of the sellers
are from Baltic states, whereas Estonian sellers comprise
31% and Finnish sellers (15%) are the main sellers
outside of the Baltic countries.
2013
2016
Estonia
31%
Latvia
19%Finland
15%
Lithuania
14%
The Netherlands
3%
Sweden
3%
USA 3%
Other
12%Estonia
20%
Latvia
16%
Finland
7%Lithuania
23%
Sweden
6%
Germany
4%
United Kingdom
4%
Denmark
4%
Cyprus
2%
United States
2%
The Netherlands
2%
Other
10%
Country of the Seller
2018
8
9
Strategic
46%
Financial/
Private Equity
20%
Individual
person(s)
29%
Family-controlled
3%
Other 2%
Nature of the Seller
• Over half of the sellers are strategic. Private equity
exits constituted only 12% of the transactions.
2013
2016
Strategic
57%
Financial/Private
Equity
12%
Individual
person(s)
22%
Family-
controlled
9%
Nature of the Seller
2018
9
10
Geography of Sellers and Targets
Country of the Seller's group head office
Country of the Target’s head office: Estonia Latvia Lithuania Finland Netherlands Sweden United States Other Total
Estonia 25 7 1 1 2 36
Latvia 1 17 1 4 6 29
Lithuania 3 1 12 3 1 2 2 24
Finland 1 1
United States 3 3
Other 3 3
Total 29 18 13 15 2 3 3 13 96
• The seller’s group head office and target’s head office are mainly in the same country.
Geography of Sellers and Targets
10
11
Estonia23%
Lithuania19%
Latvia9%
Sweden 7%UK 5%
Norway 4%
Russia 4%
Denmark4%
Finland 3%
Germany 2%
Luxemburg2%
Poland 2%Austria 2%
France 2%USA 2%
Other9%
Estonia22%
Latvia13%
Lithuania12%USA
10%
Sweden9%
Finland6%
France3%
Luxembourg3%
Other22%
Country of the Buyer
• The majority of buyers continue to be from the Baltic countries. However, the US buyers also stand out as a major investor.
2013
2016
Country of the Buyer
2018
11
12
Strategic66%
Financial/ Private Equity 27%
Individuals3%
Management buy-out
3%
Family-controlled
1%
Nature of the Buyer
• The proportion of the strategic buyer has increased and now comprises ¾ of all transactions.
2013
2016
Strategic74%
Financial/ Private Equity 16%
Individuals4%
Management buy-out6%
Nature of the Buyer
2018
12
13
Geography of Buyers and Targets
• Most Baltic buyers acquired targets in their own countries.
Country of the Buyer’s group head office
Country of the Target’s head office: Estonia Latvia Lithuania
United
States Sweden Finland France
Luxem-
bourg Other Total
Estonia 17 1 2 3 3 3 5 34
Latvia 4 11 1 2 1 2 6 27
Lithuania 1 9 3 4 2 1 4 24
United States 1 2 3
Denmark 1 1
Finland 1 1
Japan 1 1
Switzerland 1 1
Total 22 13 12 10 8 5 3 3 16 92
Geography of Buyers and Targets
13
14
Geography of Buyers and Sellers
• As regards the origin of both buyers and sellers, intra-Baltic M&A (both parties Baltic) was the most common with 32%. This was closely followed by foreign investors buying from local Baltic seller, which constituted 31% of all transactions (highlighted in green).
• In 14 transactions (16%) foreign sellers sold targets to Baltic buyers (highlighted in orange), almost three fifths of them to Estonian buyers.
• Targets changed hands among foreign parties in 20% of transactions.
Country of the Seller’s group head office
Country of the Buyer’s head office: Estonia Latvia Lithuania Finland Netherlands Sweden United States Other Total
Estonia12 3 4 19
Latvia1 4 4 3 12
Lithuania3 1 4 2 1 11
United States3 2 1 1 1 1 9
Sweden 3 1 1 1 1 1 8
Finland3 2 5
France1 2 3
Luxembourg1 2 3
Other5 4 3 1 1 3 17
Total30 16 9 13 3 3 3 10 87
Geography of Buyers and Sellers
14
Sales Process and Form of Transaction
General Transaction Characteristics
16
Nature of the Sales Process
• Compared to last periods, controlled auctions have become even
more rare and the proportion of negotiated sales is very high (88%).
2013
2016
Negotiated sale
88%
Controlled
auction
10%
Investment
1%
Takeover bid
1%
Negotiated sale
82%
Controlled
auction
16%
Other
2%
Nature of the Sales Process
2018
16
17
Form of Transaction
• As in all previous studies, most transactions
in the Baltics are share deals.
2013
2016
Shares
85%
Combination of
shares and
assets
7%
Assets
5%
Other
3%
Shares
83%
Combination of
shares and
assets
5%
Assets
5%
Joint venture
5%
Other
2%
Form of Transaction
2018
17
18
Timeline of Transactions
• The proportion of transactions
submitted is greater towards
the end
of the period surveyed.
This, however, does not
necessarily show deal activity
during the period.
Number of transactions by closing date
16
1918
38
2016 First Half 2016 Second Half 2017 First Half 2017 Second Half
Timeline of Transactions
18
Transaction Value and Payment
General Transaction Characteristics
20
EUR 1-5 million(43%)
EUR 5-10 million(18%)
EUR 10-25 million(20%)
EUR 25-50 million(10%)
EUR 50-100 million
(2%)
over EUR 100 million(7%)
Transaction Value
• The value of a typical Baltic M&A deal remains in the EUR 1-5 million bracket, although the proportion of transactions in the 5-10 million bracket has increased.
20
2013
2016
EUR 5-10 million(27%)
EUR 10-25 million(17%)
EUR 25-50 million(6%)
EUR 50-100 million(8%)
over EUR 100 million
(4%)
EUR 1-5 million(38%)
Transaction Value
2018
20
21
Distribution of Transaction Value
by Buyer and Sales Process
21
Nature of the Buyer
Transaction value Strategic Financial/ Private Equity Individuals Management buy-out Total
EUR 1-5 million 29 1 2 2 34
EUR 5-10 million 15 7 1 2 25
EUR 10-25 million 10 4 1 15
EUR 25-50 million 5 5
EUR 50-100 million 6 1 7
over EUR 100 million 3 1 4
Total 68 14 4 4 90
Sales process
Transaction value Negotiated sale Controlled auction Other Total
EUR 1-5 million 32 2 34
EUR 5-10 million 22 2 24
EUR 10-25 million 12 3 15
EUR 25-50 million 4 1 5
EUR 50-100 million 4 2 1 7
over EUR 100 million 3 1 4
Total 77 9 3 89
Distribution of Transaction Value by Buyer and Sales Process
21
22
Form of Consideration
• Almost all transactions involve cash as consideration, in line with all previous studies.
2013
2016
All cash93%
Mixed (shares and cash)
5%
All shares2%
All shares2%
All cash96%
Mixed (shares and cash)
2%
Form of Consideration
2018
22
23
Lump-sum payment
56%Payment
deferral
19%
Lump-sum
payment,
Payment
deferral
11%
Lump-sum
payment,
Earn-out
6%
Earn-out
5%
Payment deferral,
Earn-out
1%
Lump-sum payment,
Payment deferral,
Earn-out 1%
Other
1%
Payment Terms
• Lump-sum payment is
by far the most widely
used form of payment
in Baltic transactions.
2013
2016
Lump-sum payment
57%Payment deferral
20%
Lump-sum
payment, Payment
deferral
10%
Lump-sum payment,
Earn-out
7%
Payment deferral,
Earn-out
3%
Lump-sum payment,
Payment deferral,
Earn-out
2%
Other
1%
10%
29%
61%
Earn-out
Payment deferral
Lump-sum payment
Incidence of each payment term
Payment Terms
2018
23
24
Payment Terms (cont)
24
Percentage of price deferred (if deferred) Length of deferral
3 months or less(21%)
4-6 months(12%)
7-12 months(27%)
13-18 months(13%)
More than 18 months
(27%)• Deferred payment proportions
have slightly decreased, while deferral periods have stayed the same as in 2016.
2016
13%6%6%
13%11%
21%6%
21%
more than 75%more than 60% up to 75%more than 50% up to 60%more than 30% up to 50%more than 25% up to 30%more than 10% up to 25%
more than 5% up to 10%Up to 5%
9%
6%
9%
21%
3%
12%
15%
24%
More than 75%
More than 60% up to 75%
More than 50% up to 60%
More than 30% up to 50%
More than 25% up to 30%
More than 10% up to 25%
More than 5% up to 10%
Up to 5%
3 months or less(21%)
4-6 months(12%)
7-12 months(28%)
13-18 months(12%)
More than 18 months(27%)
Payment Terms (cont)
2018
2016
24
25
No price adjustment at closing
63%
Yes, there is a price
adjustment at closing
37%
Price Adjustment at Closing
2016
• Despite a slight increase in transactions with price adjustment, their number remains in the minority.
2013No price adjustment
at closing60%
Yes, there is a price adjustment at
closing40%
Price Adjustment at Closing
2018 2016
2013
25
26
Price Adjustment at Closing (cont)
• Compared to the 2016 study, there
were significantly more cases were
no adjustments were made.
• The most popular adjustment base is
net debt and net working capital combined.
2016
15%
21%
24%
41%
Other
Net debt
Net working capital
Net debt & net working capital
Adjustment based on
Seller’s favour50%Buyer’s favour/ Seller’s
favour
36%
Buyer’s favour14%
If price adjustment was made, in whose favour?
Buyer’s favour53% Seller’s favour
25%
Buyer's
favour/Seller's
favour
22%
Price Adjustment at Closing (cont)
2018
26
27
Yes, locked
box used
25%
No
75%
Locked Box Mechanism
• Similarly to the 2016 survey, about a quarter of transactions
used a locked box mechanism. However, the locked box term
increased significantly.
Up to 3
months
55%
3 to 6
months
28%
6 to 9
months
14%
More than 9
months
3%
Locked Box mechanism used Time between the locked box balance sheet date and the closing date
2016
No
72%
Yes, a locked
box mechanism
was used
28% Up to 3 months
32%
3 to 6 months
28%
6 to 9 months
16%
More than 9
months
24%
Locked Box Mechanism
2018
2016
27
28
Locked Box Mechanism (cont)
8 %
8%
14%
16%
70%
Other
Shareholder loans
Dividends
No permitted leakage
Payments in the ordinary course of business
• Similarly to the 2016 survey, most mechanisms allowed only payments in the ordinary course
of business as permitted leakage. Other leakage forms (dividends, shareholder loans)
were seldom permitted.
• In less than a 10% of cases did the buyer pay interest from the locked box date until closing.
Permitted leakage 2016
23%
7%
13%
13%
43%
Other
Shareholder loans
Dividends
No permitted leakage
Payments in the ordinary course
of business
Locked Box Mechanism (cont)
2018 2016
28
Governing Law and Dispute Resolution
General Transaction Characteristics
30
Transaction Governing Law
• Most Baltic M&A transactions are governed by the local laws of the Baltic States.
2016
Estonia
33%
Lithuania
29%
Latvia
22%
UK 8%
Denmark
2%
Sweden
2%Other 4%
Estonia
33%
Lithuania
23%
Latvia
27%
UK
6%
Finland
4%
Other
7%
Transaction Governing Law
2018 2016
30
31
English77%
Estonian7%
Latvian4%
Lithuanian9%
Russian3%
Main Agreement Language
• As in previous studies, English is by far and increasingly the predominant language.
2013
2016
English80%
Estonian9%
Latvian4%
Lithuanian7%
Main Agreement Language
2018 2016
2013
31
32
Dispute Resolution Mechanism
• Arbitration is still the most popular form of dispute resolution,
although there has been a slight increase in occasions where
courts have been used as a dispute settlement venue.
• Vilnius Court of Commercial Arbitration continues to be the most
reliable arbitration institution within the Baltic countries and Stockholm
Chamber of Commerce is the most preferred choice outside Baltics.
2013
2016
Courts
42%
Arbitration – Vilnius
Court of Comm.
Arb.
20%
Arbitration –Stockholm CC
19%
Arbitration –Finland Central CC
8%
Arbitration –Estonian CCI
6%Other
5%
Courts
36%
Arbitration –Vilnius Court
of Comm. Arb.
18%
Arbitration –Stockholm CC
24%
Arbitration –Finland Central
CC
2%
Arbitration -
Estonian CCI
9%
Arbitration – ICC
4%
Arbitration -
London CIA
2%
Other
5%
Dispute Resolution Mechanism
2018
32
33
Dispute Resolution: Existence of Disputes
33
Did the transaction give rise to any disputes?
2013
2016
No96%
Yes4%
• The proportion of M&A disputes continues to be very small.
No94%
Yes6%
Dispute Resolution: Existence of Disputes
2018
33
Representations and Warranties
35
Seller’s Representations and Warranties
• The proportion of transactions with limited warranties (i.e. only title and specific R&W) has slightly decreased compared with earlier surveys.
2013
2016
Extensive R&W66%
Limited R&W31%
No R&W 3%
Extensive R&W77%
Limited R&W21%
No R&W2%
Seller’s Representations and Warranties
2018 2016
2013
35
36
Seller’s Representations and Warranties
• The proportion of transactions with a general knowledge qualification of the warranties has remained the same as in the 2016 survey.
Do the seller’s R&W include a general knowledge qualification?
2013
2016
No53%
Yes47%
No51%
Yes49%
Seller’s Representations and Warranties (cont)
2018
2016
2013
36
37
Usage of Disclosure Letter
• The proportion of transactions using a disclosure letter has remained the same as in the 2016 survey.
2013
2016
No63%
Yes37%
No63%
Yes37%
Usage of Disclosure Letter
2018 2016
2013
37
38
Due Diligence Disclosures Considered General Qualification to R&W
• The trend of viewing due diligence as an alternative to R&W has continued.
2013
2016
No37%
Yes63%
Yes68%
No32%
Due Diligence Disclosures Considered General Qualifi cation to R&W
2016
2013
2018
38
39
Constructive
knowledge
56%
Actual
knowledge
44%
Standard of Knowledge
• The seller’s/target’s knowledge is defined in more than half of transactions.• The standard of knowledge continues to be almost equally divided between actual
and constructive knowledge.
Definition of the seller’s/target’s knowledge Standard of knowledge
No
53%
Yes
47%Constructive
knowledge
49%
Actual
knowledge
47%
Other
4%
20162016Yes
59%
No
41%
Standard of Knowledge
20182018
39
40
Title Warranties
• In all transactions, title warranties were given by the seller with respect to title, ownership and encumbrance of the sales object.
Does the seller give any title warranties?No 1%
Yes99%
2013
2016
Yes100%
Title Warranties
2018
40
41
Local GAAP
74%
IFRS
19%
Both Local GAAP
and IFRS
5%
None
2%
Warranties: Accounting Standards
• Local accounting standards are still predominantly
used in warranties.
Accounting standards used
2013
2016
Local GAAP
78%
IFRS
13%
Both local
GAAP and
IFRS…
None
5%
Other
2%
Warranties: Accounting Standards
2018
41
42
No Undisclosed Liabilities Warranty
• The proportion of deals using the no undisclosed liabilitieswarranty has increased steadily.
42
No undisclosed liabilities warranty by the seller or target
2013
2016
No32%
Yes68%
Yes74%
No26%
No Undisclosed Liabilities Warranty
2018
42
43
Full Disclosure Warranty
• The full disclosure warranty continues to be used in half of transactions.
Full disclosure warranty by the seller or target
2013
2016
No45%
Yes55%
Yes51%
No49%
Full Disclosure Warranty
2018
43
44
Full Disclosure Warranty (cont)
• The proportion of full disclosure warranty that isknowledge qualified has increased steadily.
Is it knowledge qualified?
2013
2016
No44%
Yes56%
Yes66%
No34%
Full Disclosure Warranty (cont)
2018
44
Closing and Conditions Precedent
46
Timing of Signing and Closing
• As in the previous surveys, closing is deferred in the vast majority of the transactions analysed.
2013
2016
Separate closing after signing
81%
Simultaneous signing and
closing19%
Separate closing after signing
82%
Simultaneous signing and closing
18%
Timing of Signing and Closing
2018
46
47
Closing
• In vast majority of transactions closing depends on fulfilment of conditions precedent.
Does closing or its date depend on fulfilling conditions precedent?
2016
Yes81%
No19%
Yes80%
No20%
Closing
2018 2016
47
48
Closing (cont)
Is closing subject to accuracy of representations?
Who may rely on the accuracy of representations?
• In most transactions closing is subject to accuracy of representations.• Unlike earlier studies, in most cases only the buyer can rely on the
accuracy of representations.
Yes55%
No45%
Buyer79%
Both Buyer and Seller21%
2016 2016
Yes66%
No34%
Both Buyer and Seller
48%Buyer46%
Seller6%
Closing (cont)
2018 2018
48
49
Yes51% No
49%
MAC (“material adverse change”)/ MAE (“material adverse effect”) Clause
• MAC clauses, which make closing conditional upon nothing material changing for the worse, are used in half of the deals similarly to 2016.
2013
2016
No49%
Yes51%
MAC (“material adverse change”)/ MAE (“material adverse effect”) Clause
2018
49
50
MAC (“material adverse change”)/ MAE (“material adverse effect”) Clause
Who may invoke the MAC clause?
2013
2016
• The buyer continues to be the main party who may invoke the MAC/MAE clause.
Buyer85%
Both13%
Seller2%
Seller5%
Buyer66%
Both29%
MAC (“material adverse change”)/ MAE (“material adverse effect”) Clause (cont)
2018
50
51
Competition Clearance
• The proportion of transactions subject to competition authority approval has remained about the same in all studies.
Did the transaction require approval by the competition authorities?
2016
No60%
Yes, Estonian14%
Yes, Lithuanian 14%
Yes, Latvian12%
No57%
Yes, Estonian13%
Yes, Lithuanian21%
Yes, Latvian7%
Yes, other2%
Competition Clearance
2018 2016
51
52
Long-Stop Date
• Use of a long-stop date has remained quite similar across all studies.• The 2-5 month long-stop date continues to be the most popular term. • 75% of transactions analysed imposed a break fee or exit penalty
(compared to 41% in 2016).
2016
No(33%)
Yes, less than 2 months after signing
(11%)
Yes, 2 to 5 months
after signing(34%)
Yes, over 5 months
after signing(22%)
No75%
Yes25%
Is there a break fee or exit penalty?
No (34%)
Yes, less than 2 months after
signing(23%)
Yes, 2 to 5 months after signing
(31%)
Yes, over 5 months after
signing(12%)
Was a long-stop date used?
Long-Stop Date
2018 2016
52
Liability and Indemnifi cation
54
Was there a general survival period
of warranties?
Yes
82%
No (regular
statute of
limitations)
18%
Yes
71%
No (regular
statute of
limitations)
29%
2016
How long was the survival period
of warranties?
8%
4%
9%
32%
26%
20%
Other
More than 48 months
25-36 months
19-24 months
13-18 months
7-12 months
5%
4%
7%
7%
16%
23%
4%
Other
More than 36 months
25-36 months
19-24 months
13-18 months
7-12 months
Up to 6 months
2016
• An increase has occurred in setting explicit general
survival periods for R&W compared to the 2016 study.
Survival of Warranties
2018 2018
54
55
Survival of Warranties Carve-Outs
55
• The use of carve-outs continues
to be popular.
• Title warranties, taxes and intentional
breach are the most common carve-outs.
Carve-outs to time limitations
No
29%
Yes
71%
20132016
Yes
64%
No
36%
% of positive responses with specific carve-outs
7%
9%
19%
36%
29%
14%
9%
29%
77%
62%
18%
11%
40%
43%
61%
Other
Environmental
Intentional breach
Taxes
Title warranties
2018
2016
2013
Survival of Warranties Carve-Outs
2018
55
56
Baskets and Thresholds
• Compared to the 2016 study, the use of baskets/thresholds has remained the same.
• Typically, baskets/thresholds in the Baltics are first dollar, as has been the case in all studies.
56
Baskets, de minimis or thresholds for asserting claims under the warranties?
2016
No24%
Yes76%
Yes77%
No23%
15%
85%
Deductible/excess only
First dollar threshold
Baskets and Thresholds
2018 2016
56
57
Baskets and Thresholds (cont)
• Typically, the threshold is less than 0.5% of the purchase price per claim. The thresholds continue to be progressively lower.
• The amounts of basket/thresholds for the aggregate of all claims have risen in comparison to 2016. • The most widely used amount of basket/threshold for the aggregate of all claims is
1-2% of the purchase price.
Amount of threshold per claim
2016
2016
Amount of basket/threshold for the aggregate of all claims
2%
5%
11%
82%
More than 2% of the purchase price
1-2% of the purchase price
0.5-1% of the purchase price
Less than 0.5% of the purchase price
5%
3%
8%
32%
26%
27%
More than 5% of the purchase price
3-5% of the purchase price
2-3% of the purchase price
1-2% of the purchase price
0.5-1% of the purchase price
Less than 0.5% of the purchase price
6%
4%
12%
79%
More than 2% of the purchase price
1-2% of the purchase price
0.5-1% of the purchase price
Less than 0.5% of the purchase price
7%
9%
11%
19%
21%
33%
3-5% of the purchase price
More than 5% of the purchase…
2-3% of the purchase price
0.5-1% of the purchase price
1-2% of the purchase price
Less than 0.5% of the purchase…
Baskets and Thresholds (cont)
2018
2018
2016
2016
57
58
Overall Cap or Ceiling on Liability
• The proportion of transactions with an overall cap on the seller’s liability continues to increase.
Is the seller’s liability for breach of warranties
limited to a maximum total amount?
2013
2016
No22%
Yes78%
Yes84%
No16%
Overall Cap or Ceiling on Liability
2018
58
59
Amount of Cap on Liability
• Although caps set at 100% of the purchase price continue to be common,
the proportion of caps set at 25-50% has increased.
28%
4%
11%
28%25%
5%
29%
1%
8%
20%
33%
10%
40%
2%
8%
23%
19%
8%
100% of purchase price 75-100% of purchase
price
50-75% of purchase
price
25-50% of purchase
price
Less than 25% of
purchase price
Other
Cap Amount% of transactions
2018
2016
2013
Amount of Cap on Liability
59
60
Agreement silent on sandbagging
61%
Anti-sandbagging clause37%
Pro-sandbagging clause2%
Sandbagging
• As in previous studies, the majority of Baltic transactions do not contain sandbagging clauses.
• However, the trend for explicitly dealing with sandbagging is rising, with 37% of transactions including an anti-sandbagging clause, up from 20% in the 2013 study.
Provisions limiting the buyer’s remedies if the buyerhas pre-existing knowledge of breach of warranties
2013
2016
Agreement is
silent on sand-
bagging62%
Anti-sand-bagging clause31%
Pro-sand-bagging clause
5%
Other2%
Sandbagging
2018
60
61
Security for Seller’s Obligations
• A third of transactions established a form of
security, in line with previous studies.
• The most popular forms of security continue
to be escrow accounts and deferred payment.
20132016
No
66%
Yes
34%
No
68%
Yes
32%
11%
4%
14%
39%
39%
13%
2%
13%
31%
42%
10,00%
3%
10%
41%
48%
Other
Bank guarantee
Parent’s company guarantee
Deferred payment
Escrow account
Form of security of seller's obligation
2018
2016
2013
Security for Seller’s Obligations
2018
61
62
R&W Insurance
• As in 2016, the use of R&W insurance is not yet common. R&W insurance was used in only 2 transactions.
Was any R&W insurance used in the transaction?What kind (sell-side or buy-side)?
No98%
Yes – buy-side1%
Yes – sell-side1%
No98%
Yes – sell-side2%
2016
R&W Insurance
2018 2016
62
Joint Ventures and
Shareholders’ Agreements
64
Shareholders’ Agreements (SHA)
64• The surveyed deals involved agreements between
shareholders in 24% of cases.
Is there a shareholders’ agreement
signed between the parties?
2013
2016
No79%
Yes21%
No76%
Yes24%
Shareholders’ Agreements (SHA)
2018
64
65
Lithuanian law
50%
Estonian law
39%
Latvian law
11%
Shareholders’ Agreements (SHA)
65
SHA Governing Law
2013
2016
• Compared to previous studies, shareholders’ agreements have only used local laws as governing law.
Estonian law
31%
Latvian law
22%
Lithuanian law
25%
UK law
16%
Other
6%
Shareholders’ Agreements (SHA) (cont)
2018
65
66
Shareholders’ Agreements (SHA)
6631%
28%
31%
47%
47%
56%
56%
88%
88%
72%
91%
91%
41%
41%
41%
41%
50%
53%
69%
75%
81%
94%
63%
88%
88%
21%
26%
37%
63%
63%
63%
63%
74%
74%
74%
79%
89%
95%
Exit clause(s)
Deadlock
Put option
Change of control of the shareholder
Call option
Drag along right
Unanimity requirement
Access to all the Target information
Veto rights
First refusal or pre-emptive rights
Tag along right
Restriction to sell the shares
Restriction to encumber the shares
Provisions included in the SHA
2018 2016 2013
Shareholders’ Agreements (SHA) (cont)
66
Covenants
68
Seller’s Non-Competition Obligation
• More than half of transactions included
a non-competition obligation for sellers.
• The non-compete duration has remained similar to 2016,
where the most used duration was 25-36 months,
followed by 19-24 months.
Agreement imposing a non-competition
obligation on the seller
Duration of such obligation
2016
No
49%
Yes
51%
Yes
53%
No
47%49%
33%
2%
6%
8%
25-36 months
19-24 months
13-18 months
Up to 12 months
Other
Seller’s Non-Solicitation Obligation
2018
68
69
Seller’s Non-Solicitation Obligation
• Almost half of transactions impose
a non-solicitation obligation on the seller.
• The typical duration of the obligation is 25-36 months,
which is the same as in the 2016 study,
followed by 19-24 months.
Agreement imposing a non-solicitation
obligation on the seller
Duration of such obligation
2016
No
57%
Yes
43%
Yes
51%
No
49%43%
35%
11%
4%
7%
25-36 months
19-24 months
Up to 12 months
13-18 months
Other
Seller’s Non-Solicitation Obligation (cont)
2018
69
Due Diligence
71
Due Diligence
71
Was the due diligence conducted by the buyer?2016
• In line with previous studies, buyers conducted due diligence exercises in the vast majority of cases.
• Legal and financial continue to be the most popular types of due diligence performed.
No21%
Yes79%
Yes85%
No15%
Types of buyer due diligence performed
2%
31%
35%
62%
80%
Tax due diligence
Technical due diligence
Business due diligence
Financial due diligence
Legal due diligence
Due Diligence
2018 2016
71
72
Due Diligence
• While buyers routinely carry out a target due diligence, vendor’s due diligence is still rare in the Baltic States.
Was a vendor’s due diligence conducted?
2013
2016
No87%
Yes13%
No93%
Yes7%
Due Diligence (cont)
2018
72
Duration of Transaction
and Letters of Intent
74
Use of Letters of Intent
• More than half of transactions in the Baltics were formalisedin the negotiations stage by a letter of intent.
Were the initial negotiations formalised by signing a letter of intent?
2013
2016
No44%
Yes56%
Yes55%
No45%
Use of Letters of Intent
2018
74
75
Duration of the Transaction
• As in previous studies, the majority (70%) of transactions take between 3 and 12 months from letter of intent or due diligence to closing.
2013
2016 Less than 1 month(1%)
1-3 months(19%)
3-6 months(43%)
6-12 months(27%)
More than 12 months
(10%)
3-6 months(37%)
6-12 months(33%)
More than 12 months(14%)
1-3 months(16%)
Duration of the Transaction
2018
75
76
Transaction Bonus
• Similarly to 2016, only 10% of transactions reported using transaction bonuses.
• The number may be affected by underreporting, as deals were submitted by counsel to one of the parties, who may not have known of a bonus being paid by the counterparty.
Were target managers granted any transaction bonuses?
No90%
Yes – sell-side9%
Yes – buy-side1%
2016
Yes – sellside
No90%
Yes – sell-side10%
Transaction Bonus
2018
76
Financing and Conditions Subsequent
78
• We introduced a new question, asking whether the transaction involved financing or refinancing of the business.
• 18% of the transactions involved financing.
the transaction involved financing
No82%
Yes18%
Was the transaction related to acquisition financing or refinancing of the business?
FinancingFinancing
78
79
• We introduced a new question, asking whether the transaction contained any conditions subsequent and if the conditions subsequent were used because of a need to close the transaction fast.
• The majority of transactions did not use conditions subsequent. Also, the main reason for using conditions subsequent was not the need to close the transaction fast.
No72%
Yes28%
Did the transaction contain any conditions subsequent?
Were conditions subsequent used to close the transaction fast?
28%
72%
Yes
No
Conditions Subsequent
79
Final Remarks
• The survey analysed 91 M&A transacti ons. • In 2016-2017, the most acti ve economic sectors in the Balti c M&A market were
Technology, Energy and Uti liti es, Services, Retail/Wholesale and Financial Services.• Compared to previous periods, there are no major changes as to whether foreign
or local shareholders are selling businesses in the Balti cs. • Although transacti on values vary greatly, the value of most typical Balti c M&A
transacti on remains in the EUR 1-5 million bracket.• It can be generalised that Balti c M&A counterparti es are becoming more
sophisti cated in the use of internati onally acknowledged transacti on tools, such as price adjustments, MAC clauses, liability limitati ons (warranty limitati on periods, overall caps, claim baskets and thresholds). However, R&W insurance is sti ll very seldom used in Balti c M&A transacti ons.
80
CONTACTS
ESTONIA LATVIA LITHUANIA
FOR MORE INFORMATION, PLEASE CONTACT MEMBERS OF THE WORKING GROUP:
Toomas Pranglitoomas.prangli@sorainen.com
Peeter Kutman peeter.kutman@cobalt.legal
Sven Pappsven.papp@ellex.ee
Maivi Ots maivi.ots@eversheds-sutherland.ee
Kadri Kallas kadri.kallas@tgsbaltic.com
Jānis Bitejanis.bite@sorainen.com
Guntars Zile guntars.zile@cobalt.legal
Raimonds Slaidiņš raimonds.slaidins@ellex.lv
Maris VainovskisMaris.Vainovskis@eversheds-sutherland.lv
Andra Rubene andra.rubene@tgsbaltic.com
Sergej Butovsergej.butov@sorainen.com
Juozas Rimas juozas.rimas@cobalt.legal
Paulius Gruodis paulius.gruodis@ellex.lt
Rimtis PuisysRimtis.Puisys@eversheds-sutherland.lt
Marius Matonismarius.matonis@tgsbaltic.com